Deck 13: Game Theory and Competitive Strategy

Question 1

Scenario 13.3
Consider the following game:
In the game in Scenario 13.3, the equilibrium outcome:

A) is for Moto to offer a CD changer and Zport to offer low-profile tires.
B) is for Moto to offer a CD changer and Zport to offer a sun roof.
C) is for Moto to offer free maintenance and Zport to offer low-profile tires.
D) is for Moto to offer free maintenance and Zport to offer a sunroof.
E) does not exist in pure strategies.

Answer 1

A

Question 2

Which of the following statements represents a key point about strategic decision making?

A) Strategy is less important in nonconstant sum games than in constant sum games.
B) The payoffs in cooperative games will always be higher than in noncooperative games.
C) It is essential to understand your opponent's point of view and to deduce his or her likely responses to your actions.
D) Optimal strategies in cooperative games always lead to economically efficient outcomes.

Answer 2

C

Question 3

Which of the following are examples of cooperative games?

A) The bargaining between a buyer and seller over the price of a car
B) Independent action by two firms in a market regarding advertising strategies
C) Independent pricing strategies by two firms in a market
D) Independent pricing strategies by many firms in a market
E) Team games (such as baseball or basketball)

Answer 3

A

Question 4

Use the following statements to answer the question:
I) Consider the problem of negotiating the price of a rug that costs $100 to make. If there are two buyers (one with a maximum willingness-to-pay of $200 and one with a maximum willingness-to-pay of $250), then the situation is no longer a constant sum game.
II) The likely outcome from the game described in statement I is that the second buyer will bid a price slightly above $200 to win the rug.

A) I and II are true.
B) I is true and II is false.
C) II is true and I is false.
D) I and II are false.

Question 5

Scenario 13.1:
You are negotiating with your florist over the price of flowers for your wedding. You value the floral arrangements at $500. The florist's cost for the arrangement is $200. You finally settled on a price of $250.
Refer to Scenario 13.1. Your negotiations are an example of:

A) a noncooperative game.
B) a cooperative game.
C) a constant sum game.
D) a competitive game.
E) both B and C

Question 6

Which of the following conditions, if present, is sufficient to make a game cooperative?

A) Individual payoffs are greater if all players choose the same strategy.
B) Players can communicate with each other.
C) Players can negotiate binding contracts committing them to particular strategies.
D) Players must agree unanimously on any set of strategies.
E) The payoff that is highest for all individuals together is also highest for each individual player.

Question 7

A strategy A is "dominant" for a player X if

A) strategy A contains among its outcomes the highest possible payoff in the game.
B) irrespective of any of the possible strategies chosen by the other players, strategy A generates a higher payoff than any other strategy available to player X.
C) strategy A is the best response to every strategy of the other player.
D) strategy A is the best response to the best strategy of the other player.
E) every outcome under strategy A generates positive payoffs.

Question 8

Which of the following is NOT a key component of every game?

A) Strategies
B) Players
C) Payoffs
D) Cooperation

Question 9

Scenario 13.1:
You are negotiating with your florist over the price of flowers for your wedding. You value the floral arrangements at $500. The florist's cost for the arrangement is $200. You finally settled on a price of $250.
Refer to Scenario 13.1. At your negotiated price your consumer surplus is:

A) $50.
B) $200.
C) $250.
D) $300.

Question 10

Scenario 13.1:
You are negotiating with your florist over the price of flowers for your wedding. You value the floral arrangements at $500. The florist's cost for the arrangement is $200. You finally settled on a price of $250.
Refer to Scenario 13.1. If your negotiated price had been $350 instead of $250, the sum of consumer surplus and producer surplus would be:

A) less than what would have accrued at the $250 price.
B) the same as what would have accrued at the $250 price.
C) more than what would have accrued at the $250 price.
D) None of the above is necessarily correct.

Question 11

There are two independent dealers for Sporto automobiles in a large city. The dealers decide to run a cooperative advertising campaign in which both dealers are listed in local newspapers ads, and they can purchase larger ads that are more likely to attract attention and generate more auto sales if the dealers commit more funds to the joint advertising budget. Is this an example of a cooperative constant-sum game?

A) Yes, each firm can contribute zero to 100 percent of the advertising budget, so this is a constant-sum game.
B) Yes, all negotiated outcomes between two firms are cooperative and constant-sum situations.
C) No, the outcome of the advertising campaign depends on how much money the firms contribute to the campaign, so it is not constant sum.
D) No, the firms are independent, so their interaction cannot be cooperative.

Question 12

In the spring of 1994, Northwest Airlines took the independent action of reducing fares on its flights. Other competing airlines quickly matched the fare cuts. These actions might be interpreted as:

A) a noncooperative game.
B) a cooperative game.
C) a constant sum game.
D) a competitive game.

Question 13

A dominant strategy can best be described as

A) a strategy taken by a dominant firm.
B) the strategy taken by a firm in order to dominate its rivals.
C) a strategy that is optimal for a player no matter what an opponent does.
D) a strategy that leaves every player in a game better off.
E) all of the above

Question 14

Scenario 13.2:
Consider the following game:
Which of the following is true about the game in Scenario 13.2?

A) ABC's dominant strategy is to offer a rebate.
B) ABC's dominant strategy is not offer a rebate.
C) XYZ's dominant strategy is to offer a rebate.
D) XYZ's dominant strategy is not offer a rebate.
E) Both ABC and XYZ offer a rebate as a dominant strategy.

Question 15

Scenario 13.4
Consider the following game:
Which of the following is TRUE for the game in Scenario 13.4?

A) NRG's dominant strategy is to sponsor the marathon.
B) NRG's dominant strategy is to sponsor the TV show.
C) Vita's dominant strategy is to sponsor the marathon.
D) Vita's dominant strategy is to sponsor the TV show.
E) Neither company has a dominant strategy.

Question 16

Scenario 13.2:
Consider the following game:
In the game in Scenario 13.2, the equilibrium strategies

A) are for both firms to offer rebates.
B) is for ABC to offer a rebate, and XYZ not to offer a rebate.
C) is for XYZ to offer a rebate, and ABC not to offer a rebate.
D) are for both firms to offer no rebate.
E) does not exist in pure strategies.

Question 17

Scenario 13.3
Consider the following game:
Which of the following is true for the game in Scenario 13.3?

A) Moto's dominant strategy is the CD changer.
B) Moto's dominant strategy is the free maintenance.
C) Zport's dominant strategy is the low-profile tires.
D) Zport's dominant strategy is the sun roof.
E) Neither company has a dominant strategy.

Question 18

Your economics professor has decided that your class will not be graded on a curve but on an absolute scale. Therefore, it is possible for every student in the class to get an "A." Your grade will not depend in any way on your classmates' performance. Based on this information, you decide that you should study economics three hours each day, regardless of what your classmates do. In the language of game theory, your decision to study three hours each day is:

A) a dominant strategy.
B) a minimax strategy.
C) a maximin strategy.
D) a Prisoner's dilemma.

Question 19

You are playing a game in which a dollar bill is auctioned. The highest bidder receives the dollar in return for the amount bid. However, the second-highest bidder must pay the amount that he or she bids, and gets nothing in return. The optimal strategy is:

A) to bid the smallest allowable increment below $1.
B) to bid nothing.
C) to bid $0.99.
D) to bid more than a dollar.

Question 20

Scenario 13.1:
You are negotiating with your florist over the price of flowers for your wedding. You value the floral arrangements at $500. The florist's cost for the arrangement is $200. You finally settled on a price of $250.
Refer to Scenario 13.1. At your negotiated price the producer surplus is:

A) $0.
B) $50.
C) $200.
D) $250.
E) $300.

Question 21

Nash equilibria are stable because

A) they involve dominant strategies.
B) they involve constant-sum games.
C) they occur in noncooperative games.
D) once the strategies are chosen, no players have an incentive to negotiate jointly to change them.
E) once the strategies are chosen, no player has an incentive to deviate unilaterally from them.

Question 22

Consider the following game in which two firms decide how much of a homogeneous good to produce. The annual profit payoffs for each firm are stated in the cell of the game matrix, and Firm A's payoffs appear first in the payoff pairs:

What are the dominant strategies in this game?

A) Both firms produce low levels of output
B) Both firms produce high levels of output
C) Firm A's dominant strategy is to produce low levels of output, but Firm B does not have a dominant strategy.
D) Firm B's dominant strategy is to produce low levels of output, but Firm A does not have a dominant strategy.
E) Neither firm has a dominant strategy

Question 23

Andre Agassi, a star tennis player, is playing the number one player in the world, Roger Federer. Before the match, Agassi decided that he would serve 20 percent of his serves to Federer's backhand, 30 percent of his serves to Federer's forehand, and 50 percent of his serves straight at Federer. In the language of game theory, this is known as:

A) a pure strategy.
B) a dominant strategy.
C) a mixed strategy.
D) a maximin strategy.

Question 24

The relationship between a pure-strategy Nash equilibrium and a dominant-strategy equilibrium is that

A) a dominant-strategy equilibrium is a special case of a pure-strategy Nash equilibrium.
B) a pure-strategy Nash equilibrium is a special case of a dominant-strategy equilibrium.
C) they are the same.
D) there may not be a dominant-strategy equilibrium, but there always is a pure-strategy Nash equilibrium.
E) they are mutually exclusive and exhaustive, in that a dominant-strategy equilibrium is the same thing as a mixed-strategy Nash equilibrium.

Question 25

Scenario 13.5
Consider the following game:
Which of the following is true regarding the game in Scenario 13.5?

A) Only Bull Meat has a dominant strategy.
B) Only Deer Meat has a dominant strategy.
C) Both companies have a dominant strategy: expand West.
D) Both companies have a dominant strategy: expand South.
E) Neither company has a dominant strategy.

Question 26

A Nash equilibrium occurs when

A) each firm is doing the best it can given its opponents' actions.
B) each firm chooses the strategy that maximizes its minimum gain.
C) a player can choose a strategy that is optimal regardless of its rivals' actions.
D) there is no dominant firm in a market.

Question 27

Use the following statements to answer this question:
I) If mixed strategies are allowed, every game has at least one Nash equilibrium.
II) The maximin strategy is optimal in the game of "matching pennies."

A) Both I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) Both I and II are false.

Question 28

Scenario 13.6
Consider the following game. Payoffs are in millions of dollars.
In the game in Scenario 13.6,

A) "Poison Pill" is a dominant strategy for Lawrence LLP.
B) "Dump" is a dominant strategy for Lawrence LLP.
C) "TurboTech" is a dominant strategy for ERS Co.
D) "ZamboniTech" is a dominant strategy for ERS Co.
E) No firm has a dominant strategy.

Question 29

Consider the following game in which two firms decide how much of a homogeneous good to produce. The annual profit payoffs for each firm are stated in the cell of the game matrix, and Firm A's payoffs appear first in the payoff pairs:

What is the Nash equilibrium for this game?

A) Both firms producer low levels of output
B) Both firms produce high levels of output
C) Firm A produces low levels of output, and Firm B produces high output.
D) Firm A produces high levels of output, and Firm B produces low output.
E) There is more than one Nash equilibrium for this game

Question 30

A maximin strategy

A) maximizes the minimum gain that can be earned.
B) maximizes the gain of one player, but minimizes the gain of the opponent.
C) minimizes the maximum gain that can be earned.
D) involves a random choice between two strategies, one which maximizes potential gain and one which minimizes potential loss.

Question 31

Scenario 13.6
Consider the following game. Payoffs are in millions of dollars.
In the game in Scenario 13.6, what is the Nash equilibrium?

A) The strategy pair associated with -$100, -$1.
B) The strategy pair associated with $2, -$0.5.
C) The strategy pair associated with $1, -$1.
D) The strategy pair associated with -$0.5, -$0.5.
E) There is no Nash equilibrium in pure strategies.

Question 32

Consider the following game in which two firms decide how much of a homogeneous good to produce. The annual profit payoffs for each firm are stated in the cell of the game matrix, and Firm A's payoffs appear first in the payoff pairs:

What are the dominant strategies in this game?

A) Both firms produce low levels of output
B) Both firms produce high levels of output
C) Firm A's dominant strategy is to produce low levels of output, but Firm B does not have a dominant strategy.
D) Firm B's dominant strategy is to produce low levels of output, but Firm A does not have a dominant strategy.
E) Neither firm has a dominant strategy

Question 33

In the game in Scenario 13.5,

A) there is one equilibrium: for both to expand West.
B) there is one equilibrium: for both to expand South.
C) there are two equilibria: either can expand in the West, and the other expands in the South.
D) there is only a mixed strategies equilibrium.
E) all four outcomes are equilibria.

Question 34

Scenario 13.4
Consider the following game:
In the game in Scenario 13.4, the equilibrium outcome:

A) is for both NRG and Vita to sponsor the marathon.
B) is for both NRG and Vita to sponsor the TV show.
C) is for NRG to sponsor the marathon and Vita to sponsor the TV show.
D) is for NRG to sponsor the TV show and Vita to sponsor the marathon.
E) does not exist in pure strategies.

Question 35

If both players in a game have dominant strategies, we say that the game has:

A) a constant sum.
B) a nonconstant sum.
C) independence of irrelevant alternatives.
D) an equilibrium in dominant strategies.

Question 36

In a Nash equilibrium,

A) each player has a dominant strategy.
B) no players have a dominant strategy.
C) at least one player has a dominant strategy.
D) players may or may not have dominant strategies.
E) the player with the dominant strategy will win.

Question 37

Scenario 13.6
Consider the following game. Payoffs are in millions of dollars.
Refer to the game in Scenario 13.6. What will occur if ERS Co. plays a maximin strategy?

A) -$100, -$1
B) $2, -$0.5
C) $1, -$1
D) -$0.5, -$0.5
E) There is a 0.25 chance of each outcome in that case.

Question 38

Scenario 13.7:
Consider the game below about funding and construction of a dam to protect a 1,000-person town. Contributions to the Dam Fund, once made, cannot be recovered, and all citizens must contribute $1,000 to the dam in order for it to be built. The dam, if built, is worth $70,000 to each citizen.
In the game in Scenario 13.7, the strategy pair that pays

A) $69,000 to each player is the only equilibrium.
B) ($0, -$1000) is the only equilibrium.
C) (-$1000, $0) is the only equilibrium.
D) $0 to each player is the only equilibrium.
E) $69,000 to each player and the strategy pair that pays $0 to each player are equilibria.

Question 39

BuyRight is a chain of grocery stores operating in small cities throughout the southwestern United States. BuyRight's major competition comes from another chain, Acme Food Stores. Both firms are currently contemplating their advertising strategy for the region. The possible outcomes are illustrated by the payoff matrix below.
Entries in the payoff matrix are profits. BuyRight's profit is before the comma, Acme's is after the comma.
a. Describe what is meant by a dominant strategy.
b. Given the payoff matrix above, does each firm have a dominant strategy?
c. Under what circumstances would there be no dominant strategy for one or both firms?

Question 40

Use the following statements to answer this question:
I) A player must have at least one dominant strategy in a game.
II) If neither player in a game has a dominant strategy in a game, then there is no equilibrium outcome for the game.

A) I and II are true.
B) I is true and II is false.
C) II is true and I is false.
D) I and II are false.

Question 41

Consider the Battle of the Sexes game:

Suppose both players use mixed strategies for this game. Jim chooses wrestling with probability 0.9, and Joan chooses wrestling with probability 0.5. What are the expected payoffs for the players?

A) The expected payoffs are 0.95 for Joan and 0.55 for Jim
B) The expected payoffs are 0.55 for Joan and 0.95 for Jim
C) The expected payoffs are 0.95 for both players
D) The expected payoffs are 0.55 for both players

Question 42

In the game in Scenario 13.10, there is

A) a mixed strategy equilibrium, and no other.
B) a mixed strategy and a pure strategy equilibrium.
C) a mixed strategy and two pure strategy equilibria.
D) a mixed strategy and four pure strategy equilibrium.
E) no equilibrium in either mixed or pure strategies.

Question 43

Scenario 13.7:
Consider the game below about funding and construction of a dam to protect a 1,000-person town. Contributions to the Dam Fund, once made, cannot be recovered, and all citizens must contribute $1,000 to the dam in order for it to be built. The dam, if built, is worth $70,000 to each citizen.
Refer to the game in Scenario 13.7. If each player chose a maximin strategy, the outcome would be

A) $69,000, $69,000.
B) $0, -$1000.
C) -$1000, $0.
D) $0, $0.
E) a mixed strategy equilibrium.

Question 44

The Matching Pennies game is an example of a:

A) constant-sum game.
B) nonconstant sum game.
C) game with an equilibrium in dominant strategies.
D) none of the above

Question 45

Scenario 13.8
Consider the following game:
In game in Scenario 13.8, what is the Nash equilibrium?

A) The strategy pair associated with $1, $10.
B) The strategy pair associated with $2, $0.
C) The strategy pair associated with $1, -$5000.
D) The strategy pair associated with $2, $2.
E) There is no Nash equilibrium in pure strategies.

Question 46

Scenario 13.9
Consider the following game:
Two firms are situated next to a lake, and it costs each firm $1,500 per period to use filters that avoid polluting the lake. However, each firm must use the lake's water in production, so it is also costly to have a polluted lake. The cost to each firm of dealing with water from a polluted lake is $1,000 times the number of polluting firms.
Refer to Scenario 13.9. If this game is repeated over an infinite or uncertain horizon, the most likely observed behavior will be that

A) both firms pollute.
B) only Lago pollutes.
C) only Nessie pollutes.
D) neither firm pollutes.
E) the firms alternate polluting in different periods.

Question 47

Consider the Matching Pennies game:

Suppose both players use maximin strategies for this game. Is there a clear equilibrium outcome to the game in this case?

A) Yes, both players select heads
B) Yes, both players select tails
C) No, both players face the minimum payoff (-1) under both actions.
D) We do not have enough information to answer this question.

Question 48

Scenario 13.9
Consider the following game:
Two firms are situated next to a lake, and it costs each firm $1,500 per period to use filters that avoid polluting the lake. However, each firm must use the lake's water in production, so it is also costly to have a polluted lake. The cost to each firm of dealing with water from a polluted lake is $1,000 times the number of polluting firms.
Refer to Scenario 13.9. What kind of game is being played by Lago and Nessie?

A) Battle of the Sexes.
B) Prisoners' Dilemma.
C) Beach Location.
D) Stackelberg Output Choice.
E) Cournot Output Choice.

Question 49

Which of the below outcomes is the result of a Nash equilibrium in pure strategies for the game in Scenario 13.10?

A) -5, 5
B) 10, -10
C) 8, -8
D) 0, 0
E) There is no pure strategy equilibrium in this game.

Question 50

Scenario 13.10
Consider the game below:
What is true about dominant strategies in the game in Scenario 13.10?

A) "Use more caffeine" and "have a sweepstakes" are dominant strategies.
B) "Use more caffeine" and "create a diet soda" are dominant strategies.
C) "Make animal-shaped bottles" and "have a sweepstakes" are dominant strategies.
D) "Make animal-shaped bottles" and "create a diet soda" are dominant strategies.
E) There are no dominant strategies.

Question 51

Consider the Matching Pennies game:

Suppose Player A always uses a pure strategy that selects heads, and Player B always uses a pure strategy that selects tails. Is this outcome a Nash equilibrium?

A) Yes, both players have no incentive to change their actions.
B) No, Player A would want to switch to tails.
C) No, Player B would want to switch to heads.
D) No, Player B would want to switch to tails.

Question 52

Scenario 13.10
Consider the game below:
The game in Scenario 13.10 is

A) variable-sum.
B) constant-sum.
C) cooperative.
D) a Prisoners' Dilemma.
E) a Cournot Production Cross.

Question 53

Scenario 13.9
Consider the following game:
Two firms are situated next to a lake, and it costs each firm $1,500 per period to use filters that avoid polluting the lake. However, each firm must use the lake's water in production, so it is also costly to have a polluted lake. The cost to each firm of dealing with water from a polluted lake is $1,000 times the number of polluting firms.
What is true about dominant strategies in the game in Scenario 13.9?

A) "Pollute" is a dominant strategy for both firms.
B) "Pollute" is a dominant strategy for Lago only.
C) "Don't Pollute" is a dominant strategy for both firms.
D) "Don't Pollute" is a dominant strategy for Lago only.
E) There are no dominant strategies.

Question 54

Scenario 13.8
Consider the following game:
In game in Scenario 13.8, what will occur if IVY Corp. plays a maximin strategy?

A) $1, $10
B) $1, -$5000
C) $2, $0
D) $2, $2
E) There is a .25 chance of each outcome in that case.

Question 55

Scenario 13.9
Consider the following game:
Two firms are situated next to a lake, and it costs each firm $1,500 per period to use filters that avoid polluting the lake. However, each firm must use the lake's water in production, so it is also costly to have a polluted lake. The cost to each firm of dealing with water from a polluted lake is $1,000 times the number of polluting firms.
Refer to Scenario 13.9. The equilibrium of this game, if played only once, is that

A) both firms pollute.
B) only Lago pollutes.
C) only Nessie pollutes.
D) neither firm pollutes.
E) the firms choose a mixed strategy.

Question 56

Consider the Matching Pennies game:

Suppose Player B always uses a mixed strategy with probability of 3/4 for head and 1/4 for tails. Which of the following strategies for Player A provides the highest expected payoff?

A) Mixed strategy with probability 1/4 on heads and 3/4 on tails
B) Mixed strategy with probability 1/2 on heads and 1/2 on tails
C) Mixed strategy with probability 3/4 on heads and 1/4 on tails
D) Pure strategy in which Player A always selects heads

Question 57

Scenario 13.9
Consider the following game:
Two firms are situated next to a lake, and it costs each firm $1,500 per period to use filters that avoid polluting the lake. However, each firm must use the lake's water in production, so it is also costly to have a polluted lake. The cost to each firm of dealing with water from a polluted lake is $1,000 times the number of polluting firms.
A "mixed strategy" equilibrium means that

A) the strategies chosen by the players represent different behaviors.
B) one player has a dominant strategy, and one does not.
C) one player has a pure strategy, and one does not.
D) the equilibrium strategy is an assignment of probabilities to pure strategies.
E) the equilibrium strategy involves alternating between a dominant strategy and a Nash strategy.

Question 58

Scenario 13.8
Consider the following game:
The game in Scenario 13.8 is

A) variable-sum.
B) constant-sum.
C) cooperative.
D) a Prisoner's Dilemma.
E) a Conjoint Crux.

Question 59

Consider the Matching Pennies game:

Suppose Player A always uses a pure strategy that selects heads. What is Player B's optimal response to this pure strategy?

A) Always select heads.
B) Always select tails.
C) Mixed strategy with probability 1/2 on heads and 1/2 on tails
D) There is no optimal pure or mixed strategy for this situation.

Question 60

Scenario 13.8
Consider the following game:
In game in Scenario 13.8,

A) Y is a dominant strategy for IVY Corp.
B) Z is a dominant strategy for IVY Corp.
C) A is a dominant strategy for SAC Group.
D) B is a dominant strategy for SAC Group.
E) No firm has a dominant strategy.

Question 61

Repetition of a game

A) yields the same outcome, over and over.
B) can result in behavior that is different from what it would be if the game were played only once.
C) is not possible.
D) makes cooperative games into non-cooperative games.
E) is possible only if the payoffs in the matrix change.

Question 62

When cost and demand are stable over time in an industry, repetition of Prisoners' Dilemma situations

A) can yield cooperative outcomes because firms can explicitly collude to set prices.
B) can yield cooperative outcomes even when firms do not explicitly collude to set prices.
C) cooperative or noncooperative outcomes may occur, but cooperation is harder than when the market is unstable.
D) will tend to yield noncooperative outcomes.
E) will always yield noncooperative outcomes.

Question 63

Consider the Battle of the Sexes game:

Suppose both players use maximin strategies for this game. Is there a clear equilibrium outcome to the game in this case?

A) Yes, both players select wrestling
B) Yes, both players select opera
C) No, both players face the minimum payoff (0) under both actions.
D) We do not have enough information to answer this question.

Question 64

A "Credible Threat"

A) is also called a "tit-for-tat" strategy.
B) always set a low price.
C) minimizes the return of your opponent.
D) is a strategy selection that is in your best interest.
E) provides the best return for both players.

Question 65

Two firms at the St. Louis airport have franchises to carry passengers to and from hotels in downtown St. Louis. These two firms, Metro Limo and Urban Limo, operate nine passenger vans. These duopolists cannot compete with price, but they can compete through advertising. Their payoff matrix is below:
a. Does each firm have a dominant strategy? If so, explain and what that strategy is.
b. What is the Nash equilibrium? Explain where the Nash equilibrium occurs in the payoff matrix.

Question 66

Which of the following situations is likely to generate noncooperative behavior in repeated games?

A) The game is repeated a finite number of times.
B) There are many players in the game.
C) The payoffs can change rapidly from one game period to the next.
D) All of these situations can generate noncooperative behavior.

Question 67

An oligopolistic situation involving the possible creation of barriers to entry would probably best be modeled by a

A) cooperative game.
B) Prisoners' Dilemma game.
C) Battle of the Sexes game.
D) repeated game.
E) sequential game.

Question 68

Consider two firms, X and Y, that produce super computers. Each can produce the next generation super computer for the military (M) or for civilian research (C). However, only one can successfully produce for both markets simultaneously. Also, if one produces M, the other might not be able to successfully produce M, because of the limited market. The following payoff matrix illustrates the problem.
a. Find the Nash equilibrium, and explain why it is a Nash equilibrium.
b. If Firm X were unsure that the management of Firm Y were rational, what would Firm X choose to do if it followed a maximin strategy? What would both firms do if they both followed a maximin strategy?

Question 69

G.C. Donovan Company is a large pharmaceutical company located in the U.S., but with worldwide sales. Donovan has recently developed two new medications that have been licensed for sale in European Union countries. One medication is an over-the-counter cold preparation that effectively eliminates all cold symptoms, while the other is an antibiotic that is effective against drug resistant bacteria. A European firm, Demtech Limited, has developed drugs that are similar to Donovan's and will be ready for the European market at approximately the same time. Liability concerns make it unlikely that either firm will choose to market both new drugs at this time. Both firms do plan to market one of the drugs this year.
Donovan's managers consider their own lack of reputation among European physicians to be an important obstacle in the antibiotic market. Consequently, Donovan feels more comfortable marketing the cold preparation. Demtech, on the other hand, has an excellent reputation among physicians but little experience in over-the-counter drugs so that Demtech's competitive advantage is with the antibiotic. Should Demtech choose to market the cold remedy, it believes that its sales will increase if Donovan also enters the cold remedy market and advertises heavily. Similarly, Donovan anticipates that its sales in the antibiotic market would be enhanced if Demtech produces antibiotics, given Demtech's excellent reputation among physicians. In short, each firm believes that there are circumstances under which participation by the other firm will complement rather than compete with the firm's own sales. Profits in millions of dollars are given in the payoff matrix below.
a. Given the table above, does either firm have a dominant strategy? Is there a Nash equilibrium? (Explain the difference between a Nash equilibrium and a dominant strategy.)
b. Pharmaceutical firms within the EU are attempting to organize a risk pool that would share liability risks for new drugs. Since Donovan and Demtech are among the largest pharmaceutical companies operating in Europe, the benefits of the risk pool depend upon the participation of the other firm. Increased profits achieved through reduced risk liability (measured in millions of dollars) are shown in the payoff matrix below.
Does either firm have an incentive to use participation in the risk pool as a bargaining device in the drug-marketing decision? If so, what would be the nature of the bargain? How credible is the firm's bargaining position? What could be done to make the bargaining position more credible?

Question 70

Why does cooperative behavior break down in games with finite endpoints?

A) Each player has an incentive to deviate from a cooperative strategy during the last period.
B) A Nash equilibrium in pure strategies is not possible in finite repeated games.
C) Finite games have the same outcomes as one-period games, and cooperation is not possible in one-period games.
D) A Nash equilibrium is only possible in mixed strategies in finite repeated games, but all of the probabilities assigned to particular strategies approach zero as the number of finite game periods becomes large. Thus, we cannot evaluate the expected payoffs in these games.

Question 71

Scenario 13.11
Consider the game below:
What kind of game is shown in Scenario 13.11?

A) Axelrod's Paradox
B) Stackelberg Match
C) Prisoners' Dilemma
D) Cournot's Duopoly Game
E) It is not possible to tell what kind of game it is because the strategies have not been identified.

Question 72

In the sequential version of a game using the same players, the same strategies, and the same possible outcomes as the original game, the equilibrium

A) may be different than in the original game.
B) must be different than in the original game.
C) will be the same as in the original game.
D) is the same as the cooperative version of the original game.
E) is the same as the noncooperative version of the original game.

Question 73

For infinitely repeated games in which the players follow a tit-for-tat strategy, which one of the following outcomes is NOT possible?

A) The players cooperate with one another until someone decides to not cooperate, and then the other players will not cooperate for some period of time.
B) There can be dominant strategies.
C) If the information about another player's action is limited, then some cooperative actions may be incorrectly interpretted as "not cooperate."
D) All of the above are possible outcomes.

Question 74

The strategy that worked best in Axelrod's experiments using the Prisoners' Dilemma game was to

A) play the "cooperate" ("don't confess") strategy.
B) play the "defect" ("confess") strategy.
C) alternate between "cooperate" and "defect" strategies.
D) play the "cooperate" strategy at first, and from then on do whatever the other player did in the previous round, cooperating if the other player did, and defecting if the other player did.
E) play the "cooperate" strategy in the first round, and from then on cooperate so long as the other player does, but if the other player defects, then play the "defect" strategy from that time forward.

Question 75

Scenario 13.11
Consider the game below:
What is true about dominant strategies in the game in Scenario 13.11?

A) R1 and C1 are dominant strategies.
B) R1 and C2 are dominant strategies.
C) R2 and C1 are dominant strategies.
D) R2 and C2 are dominant strategies.
E) There are no dominant strategies.

Question 76

Once the state environmental protection agency devises its new policy to protect the environment, firms decide whether to remain in the state or move their operations to a neighboring state. In the language of game theory, this is an example of:

A) a cooperative game.
B) a sequential game.
C) a threat.
D) the Prisoner's dilemma.

Question 77

It can be rational to play tit-for-tat in a repeated Prisoners' Dilemma game

A) only if the game is played an infinite number of times.
B) if the game is played an infinite number of times, or if it is uncertain how many times it will be played.
C) only if the game is played a finite number of times, and that number is known by all the players in advance.
D) for n-1 of the n periods it will be played, if n is known in advance.
E) at no time; tit-for-tat is an irrational strategy in this situation.

Question 78

The widget market is controlled by two firms: Acme Widget Company and Widgetway Manufacturing. The structure of the market makes secret price cutting impossible. Each firm announces a price at the beginning of the time period and sells widgets at the price for the duration of the period. There is very little brand loyalty among widget buyers so that each firm's demand is highly elastic. Each firm's prices are thus very sensitive to inter-firm price differentials. The two firms must choose between a high and low price strategy for the coming period. Profits (measured in thousands of dollars) for the two firms under each price strategy are given in the payoff matrix below. Widgetway's profit is before the comma, Acme's is after the comma.
a. Does either firm have a dominant strategy? What strategy should each firm follow?
b. Assume that the game is to be played an infinite number of times. (Or, equivalently, imagine that neither firm knows for certain when rounds of the game will end, so there is always a positive chance that another round is to be played after the present one.) Would the tit-for-tat strategy would be a reasonable choice? Explain this strategy.
c. Assume that the game is to be played a very large (but finite) number of times. What is the appropriate strategy if both firms are always rational?

Question 79

A "sequential game" is

A) another term for a repeated game.
B) another term for a cooperative game.
C) the term for a game in which individuals receive their payoffs at different times.
D) the term for a game in which individuals do not commit to strategy choices at the same time.
E) the term for a game in which each outcome occurs, one after the other, as the game is repeated over time.

Question 80

Scenario 13.11
Consider the game below:
In the game in Scenario 13.11, equilibrium is

A) R1, C1.
B) R1, C2.
C) R2, C1.
D) R2, C2.
E) a mixed strategy based on all four pure strategies.